How will new tax rules affect you?

Now that the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 is law, you'll want to familiarize yourself with how this new legislation affects you - both as a wage earner and an investor.

Consider these key parts of the new tax laws:

Income tax rates remain the same. Under previous legislation, tax rates were scheduled to rise in 2011, but the new laws will keep all tax brackets the same.

Payroll taxes reduced by two percent. Your share of the Social Security payroll tax will drop from 6.2 percent to 4.2 percent for 2011. Consequently, you should see more take-home pay. You may want to consider investing at least part of this savings in another retirement account, such as an IRA.

Top capital gains and dividend tax rates stay at 15 percent. The question of what would happen to capital gains and dividend taxes has been of great interest to most investors. For the past several years, the highest capital gains and dividend tax rate has been 15 percent. However, this 15 percent rate was scheduled to expire at the end of 2010; after that, dividends were to be taxed at one's standard income tax rate, while long-term capital gains would be taxed at 20 percent for anyone above the 15 percent income tax bracket. But due to the new legislation, the highest tax rate for both capital gains and dividends will stay at 15 percent for at least 2011 and 2012.

The capital gains and dividend tax provisions can have significant effects on your investment decisions over the next two years. You still have a strong incentive to follow a "buy-and-hold" investment strategy, under which you'd earn the favorable 15 percent rate on capital gains from selling an appreciated asset, such as a stock, that you've held at least one year. And the 15 percent rate on dividend taxes will continue to provide you with good reason to seek out those stocks that regularly pay dividends; besides offering an advantageous tax rate, dividends, when reinvested, can help build your ownership stake in the dividend-paying investments. (Keep in mind, though, that companies are not obligated to pay dividends and can reduce or discontinue them at any time.)

Vote on this Story by clicking on the Icon


Use the comment form below to begin a discussion about this content.

Sign in to comment